Ch19 Management Accounting 5e

20/01/2014
Chapter 19
Information for tactical decisions
Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith
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Outline
The management accountants role in decision making Characteristics of relevant information Accept or reject a special order Make or buy a product Outsourcing decisions Add or delete a product or department Joint products: sell or process further Implications of ABC analysis for decisions Incentives for decision makers Pitfalls to avoid when using accounting data for decisions
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The management accountants role in decision making

To provide relevant information to managers and teams who make the decisions Tactical decisions
Do not require significant or permanent resource commitments Can be changed or reversed quickly
Long-term decisions
Tend to be more strategic in nature May involve increases or decreases in capacity-related resources More difficult to reverse and effects may extend over longer time periods
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A model of the decision-making process

1. 2. 3. 4. Clarify the problem Identify alternative courses of action Collect relevant cost and benefits Compare the costs and benefits of each possible course of action 5. Select a course of action
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Characteristics of relevant information

Different under competing courses of action
May include opportunity costs
The potential benefit given up when one course of action is chosen over another
Relates to the future

Sunk costs are ignored
Costs that have already been incurred and are irrelevant to any future decisions
Prediction of future costs may be based on past data
(cont.)
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Characteristics of relevant information (cont.)

Timeliness versus accuracy
Information available in time to be used in the decisionmaking process As accuracy increases, timeliness may decrease
Quantitative or qualitative
Quantitative information can be expressed in numeric terms, such as dollars Qualitative information cannot be expressed easily in numerical terms
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The importance of providing only relevant information

Generating information is a costly process Supplying irrelevant data can result in a waste of managerial resources Information overload decreases the effectiveness of decision making
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Information for unique versus repetitive decisions

Unique decisions
Arise infrequently or only once Relevant information will often be found both inside and outside the organisation Relevant information is harder to generate
Repetitive decisions
Made at regular or irregular intervals May draw on a large amount of historical data Relevant information is readily available
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Information for decisions: terminology

Incremental revenue
The additional revenue that will be gained as a result of choosing one course of action over another
Incremental costs
The additional costs that arise from choosing one course of action over another
(cont.)
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Information for decisions: terminology (cont.)

Avoidable costs
Costs that will not be incurred in the future if a particular decision is made
Unavoidable costs
Costs that will continue to be incurred no matter which decision alternative is chosen Irrelevant to the decision
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Accept or reject a special order

Whether or not to supply a customer with a single, one-off order for goods or services, at a special price Spare capacity occurs where equipment, labour or other inputs to production are not being utilised and, hence, are available for other purposes
If incremental revenues are greater than incremental costs, the order should be accepted, on financial grounds Allocated fixed costs should not be included Assumes that there are no alternative uses for the spare resources (cont.)
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Accept or reject a special order (cont.)

If there is no spare capacity
The analysis should take account of opportunity costs associated with the use of the limited capacity
If the decision is not a one-off decision

Pricing may need to be reviewed to cover facility costs If capacity is limited, then it may need to be increased to ensure that all profitable business can be accommodated
Strategic issues
Long-term strategic issues may include whether the decision to accept the special order will impact on the business reputation or relationships with existing customers
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Make or buy a product

Involves the choice of whether to produce a product, or purchase it from an external supplier Consider avoidable versus unavoidable costs Opportunity costs are often relevant
Lost profits from using capacity to make the product
Strategic issues may include

Quality of the purchased product Delivery responsiveness, technical capabilities, labour relations and financial stability of the supplier Ability of the supplier to respect confidential information
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Outsourcing decisions
Outsourcing occurs when part of a manufacturing process, or another function normally undertaken within an organisation, is contracted to an outside business Tends to be a long-term decision rather than a tactical make or buy decision Difficult and costly to reverse
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Add or delete a product, service or department

Consider which costs and benefits will change if the decision is taken Has long-term implications Conventional accounting data that contains cost allocations should be treated with care Strategic issues
If we delete a product, will this affect sales of other products? Will we loose customers? Will it impact capacity? Deleting a department may impact on employee morale
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Joint products: sell or process further

Joint products
Two or more products produced simultaneously from the one production process Cannot be separated prior to split-off
Split-off point
The stage in the production process when the joint products are identifiable as separate products
Joint cost
All manufacturing costs incurred in the production of joint products
Relative sales method

A method of allocating joint cost to joint products in proportion to their sales value at the split-off point
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Implications of activity-based cost analysis for decisions

Identification of relevant costs, incremental costs, opportunity costs, sunk costs and avoidable costs Costs may be more accurately assigned to products or departments Leads to the identification of precise cost implications of various decision alternatives
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Incentives for decision makers

Managers typically make decisions that will maximise their reported performance and rewards Cost systems may be designed explicitly to encourage certain biases in decision making To encourage managers and employees to make certain decisions, systems must be designed with this in mind
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Pitfalls to avoid in using accounting data for decisions

1. Ignore sunk costs 2. Beware of unitised fixed costs in decision making 3. Beware of allocated fixed costs; identify the avoidable costs 4. Pay special attention to identifying and including opportunity costs in a decision analysis
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Summary
Tactical decisions do not require significant changes in capacity and can be changed if better opportunities arise Relevant information will include quantitative and qualitative information, as well as strategic issues In decision analysis, incremental revenues and costs are usually the focus, and in some cases so are avoidable costs Identifying whether there is spare capacity is important in special orders and make or buy decisions, as opportunity costs become relevant where there is no spare capacity
(cont.)
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Summary (cont.)
Adding or deleting a product/department involves consideration of avoidable and unavoidable costs Processing joint products further requires consideration of incremental revenue and costs ABC system may provide more accurate information than costs generated from conventional costing systems Management incentives can sometimes distort the collection and analysis of information in decisions Accounting data should be used carefully in decision analysis as it can be problematic
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20/01/2014

The management accountants role in decision making

A model of the decision-making process

Characteristics of relevant information

Relates to the future

Prediction of future costs may be based on past data

Characteristics of relevant information (cont.)

The importance of providing only relevant information

Information for unique versus repetitive decisions

Information for decisions: terminology

Information for decisions: terminology (cont.)

Accept or reject a special order

Accept or reject a special order (cont.)

If the decision is not a one-off decision

Make or buy a product

Strategic issues may include

Add or delete a product, service or department

Joint products: sell or process further

Relative sales method

Implications of activity-based cost analysis for decisions

Incentives for decision makers

Pitfalls to avoid in using accounting data for decisions

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